Because I am a geek, compounded by the fact that the Orioles were playing a late game on the West Coast, I spent part of last night updating my ongoing bank M&A research, looking for any trends or patterns that might help us maximize the trade of the decade returns. I ran across a post on GonzoBanker.com (one of my favorite banking-related blogs; highly recommended reading) back in February.
Cornerstone Advisors CEO Scott Sommer wrote about his inaugural trip to the "Acquire or Be Acquired" banking conference put on each year by Bank Director, the financial industry information firm. I had read the article before, but my re-reading identified what may be an opportunity for us as long-term investors.
He noted in his article that conference attendees seem to feel that $5 billion is probably the new floor when it comes to the many assets needed to remain independent and thrive. Banks above that level are going to have the best currency for making deals, and the asset base can help spread out the costs of things like regulations and technology upgrades. He also noted that right now banks between $2.5 billion and $5 billion in assets are performing very well.
While those statements appear to be taking opposite positions, I am not sure that's the case. Right now the $2.5 billion to $5 billion banks are likely to be getting the best push form short-term tailwinds like credit improvement and decent commercial loan demand. Eventually, the rising costs will catch up to them and they will have to grow above the $5 billion level or will be acquired by larger banks looking to expand their own asset level and branch footprint.
This morning I sat down and looked for stocks in that $2.5 billion to $5 billion asset size that might be bargain issues worth long-term ownership. Not only did I find some that were bargains, I also discovered that some of these mid-sized banks have shareholder lists that look a lot like our little banks.
First Bancorp (FBNC) is in the Southeastern market, which has been seeing strong consolidation activity. It is based in Southern Pines, North Carolina, and has 73 branches operating in North Carolina, six branches in South Carolina, and seven branches in Virginia. The stock trades right around book value, and insiders have been constituent buyers of the bank they oversee. The shareholder list has familiar names like Castle Creek, Basswood and Wellington, who are bank specialists and activists.
In the earnings call last week, Richard H. Moore, CEO of First Bancorp, commented on his bank's results and condition, telling investors: "Today's earnings report reflects another strong quarter for our company. Earnings exceeded $5 million for the ninth consecutive quarter, and asset quality continues to improve. Also, we experienced solid growth in loans during the quarter." The bank has $3.2 billion in assets and I think it is an attractive target for someone looking to expand in the Southeastern market.
Peoples Bancorp (PEBO) has been on an acquisition binge of late, buying Midwest Bancshares, Ohio, Heritage Bancorp, North Akron Savings Bank and NB&T in the last 14 months. As a result, assets have grown from $2.5 billion to $3.2 billion over the past year. Earnings were down in the most recent quarter due to acquisition-related expenses and a higher headcount, but over the past five years Peoples has averaged 44% earnings growth and analyst are looking for almost 40% over the next year as well.
The bank is more of a growth stock than a sleepy little bank stock, yet it trades at just 92% of book value. The shareholder list has a familiar look, with bank stock specialists including Banc Funds LLC, Wellington and Jacobs Asset Management all having a stake.
Republic Bancorp (RBCAA) has been a favorite larger regional for some time now. The Louisville, Kentucky-based bank has $4 billion in assets, with 40 branches primarily in Kentucky, although they do have a presence in Indiana, Ohio and Tennessee as well. Earnings were up 32% year over year in the second quarter and loan growth remains strong for Republic.
It is looking for an acquisition to expand over the $5 billion mark, but it is a very picky buyer. CEO Steve Trager commented on the search, telling investors in the last earnings release that "while we have made well known our desire to make a prudent bank acquisition in the near term, our ability to grow organically through our various origination channels provides us the opportunity to remain disciplined in seeking the right partner."
The shares are priced at 92% of book value and we have a lot of the usual suspects in the shareholder list. Seizert Capital, Basswood and LSV Asset Management all own stock in Republic.
My preference for the smaller banks is pretty well documented, but if you prefer larger, more liquid bank stocks, these three in the mid-range for assets might be worth considering as part of a long-term portfolio.